In 1996 Israel experienced a change of government and a change of policy that threatened to unhinge the already shaky Middle East peace process. Elected prime minister in late May, the right-wing Likud leader Benjamin Netanyahu (see BIOGRAPHIES) insisted on renegotiating an agreement for the redeployment of Israeli forces in the West Bank town of Hebron, lifted the freeze on building by Jewish settlers, and declared that his government was no longer bound by the principle of "land for peace" that had been a basis of Middle East peacemaking. Netanyahu’s new policies exacerbated relations with the Palestinians, but at the year’s end it appeared that he had reached an agreement with Palestine Liberation Organization leader Yasir Arafat for a withdrawal of Israeli troops from most of Hebron.

In their first democratic elections, over 750,000 Palestinians in the West Bank and Gaza voted on January 20 to elect an 88-member Legislative Council and a president. The outcome was an overwhelming victory for Arafat, who was elected president with 88.1% of the popular vote and whose Fatah supporters won more than 60 seats on the Council. His close confidant, Ahmed Qurie (Abu Ala), one of the main Palestinian negotiators of the Oslo peace deal with Israel, was elected speaker.

Almost immediately after the election, things started to go wrong for the Palestinians, the peace process, and the incumbent Labor Party government in Israel. In early January Israeli agents had assassinated Yahya Ayyash, the fundamentalist Palestinian leader known as "the engineer" for his bomb-making expertise. Retaliation by the Hamas and Islamic Jihad fundamentalists was devastating. A spate of suicide bombings in late February and early March left more than 50 Israelis dead and led many to question the rationale behind the peacemaking with the Palestinians. Overnight, Netanyahu gained some 20% in the race against acting prime minister Shimon Peres.

In the wake of the bombings, Israel launched a determined crackdown against the fundamentalists, sealing off the Palestinian areas from Israel proper and imposing an internal closure on 465 Palestinian communities as Israeli security forces conducted house-to-house searches. Warned by the Israelis that continued violence could subvert the entire peace process, Arafat also clamped down on the fundamentalists.

Israel, Egypt, and the U.S. took the lead in coordinating international efforts to curb the terror and save the peace process. On March 13 an international antiterrorism conference, held at the Egyptian resort town of Sharm el-Sheikh, was attended by world leaders, including 14 Arab delegations, who lined up in unprecedented solidarity with Israel and against terrorism. Of the Arab states invited, only Syria and Lebanon stayed away. U.S. Pres. Bill Clinton went on to Israel and pledged a $100 million antiterrorist package, including new state-of-the-art explosive detectors.

Many observers saw the conference and the Clinton visit as thinly veiled attempts to boost Peres’s reelection prospects. The impact of the bombings and a lacklustre campaign by Labor paved the way for a stunning upset at the polls on May 29. On election day, blanket support for Netanyahu from religious Jews opposed to Labor’s perceived secularism and Peres’s perceived readiness to contemplate a Palestinian state that would include part of the "Holy Land" of Israel finally turned the tables, and in Israel’s first-ever direct election of the prime minister, Netanyahu edged Peres by less than 1% of the popular vote.

The fierce ideological debates and growing fragmentation of Israeli society highlighted in November 1995 by the assassination of Prime Minister Yitzhak Rabin, were reflected in the strong election showing by small ideological and ethnic parties in the new 120-member Knesset (parliament). (For detailed election results, see Political Parties, above.)

Netanyahu’s central election slogan had been "peace with security," with the emphasis on security. The consternation his promise of a tougher line caused on the Palestinian side was compounded by his initial refusal to meet Arafat face to face and by the severe economic hardship caused by the ongoing internal closure, which had prevented thousands of Palestinians from going to their jobs in Israel.

When in late September Netanyahu unilaterally opened the entrance to a 2,000-year-old tunnel that passed near the al-Aqsa Mosque and led to a Muslim quarter in East Jerusalem, the simmering unrest erupted into full-scale violence. In the ultimate malfunction of the Oslo process, Palestinian police and Israeli soldiers, who only days before had been conducting joint patrols, fired at each other. Fifteen soldiers and more than 60 Palestinians died before calm was restored.

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To stop the process from breaking down altogether, Clinton summoned Netanyahu, Arafat, and Jordan’s King Hussein to Washington. At the early October summit, Netanyahu warmly shook Arafat’s hand and reaffirmed Israel’s commitment to the peace process.

The government acted against Jewish extremists it believed were planning to provoke the Palestinians or to assassinate leading members of the right-wing government they had helped to elect and whom they were now accusing of betrayal. On March 27 Yigal Amir, the right-wing religious zealot who had gunned down Rabin, had been sentenced to life imprisonment for the assassination and an additional six years for wounding one of Rabin’s bodyguards.

Relations between Israel and Syria deteriorated rapidly after the Netanyahu victory, and there was tension with Jordan and Egypt. Less than a week after Netanyahu established his new right-wing government in mid-June, the Arabs held an emergency summit in Cairo and demanded reaffirmation of the principle of "land for peace."

In late August Syrian troop movements in Lebanon caused alarm in Israel, and by October Israeli intelligence officials were, for the first time in years, speaking openly of the possibility of war. Despite a general mood of budgetary austerity, the army demanded and got special allocations to meet the new threat.

The year in regard to relations with Syria had begun very differently, with Peres pushing hard for an early peace deal. He had become prime minister in the wake of the Rabin assassination, and, although urged by close advisers to call an immediate election, he hoped first to consolidate his leadership position through a major breakthrough with Syria. In February, when Syrian Pres. Hafez al-Assad indicated he would meet the Israeli leader only after a peace deal had been struck, Peres called an early election for May.

In early April Syrian and Iranian-backed Hezbollah fighters fired Katyusha rockets at Israeli border towns and villages. Accused of weakness in fighting terror (and in the midst of a tough election campaign), Peres responded by unleashing a major military action. For 17 days Israeli air force and artillery units pounded Hezbollah positions and Lebanese strategic installations. There was an international outcry when Israeli gunners inadvertently hit a UN post at Qana, Leb., killing some 100 Shi’ite refugees who had taken shelter there.

After nearly three weeks of fighting, U.S. Secretary of State Warren Christopher brokered a new cease-fire agreement, which prohibited attacks on civilians as well as strikes across the border into Israel. It differed only marginally from the agreement brokered by the U.S. after Israel’s almost identical operation in July 1993 and did not put a stop to the low-level ongoing fighting in southern Lebanon.

Major developments in Israeli relations with Turkey in 1996 also affected Israeli-Syrian relations. In February Israel and Turkey concluded a secret agreement on military cooperation, which included Israeli air force training flights over Turkish territory close to the Syrian and Iraqi borders. In March Turkish Pres. Suleyman Demirel underlined the burgeoning relationship by visiting Israel. Syrian fears were largely allayed when the veteran Islamist leader Necmettin Erbakan (see BIOGRAPHIES) took over as prime minister of Turkey in late June and put ties with Israel on the back burner.

The slowdown in the peace process had an adverse effect on foreign investment. It was mostly the economy’s structural problems, however, that led to a dramatic drop in economic growth, down from 7% in 1995 to 4%, with the 1997 forecast only 2%. Netanyahu’s panacea was privatization, but he was slow in getting it started. He also faced strong internal opposition to plans for essential budget cuts. Inflation was held in check at about 10% by soaring interest rates, which kept the sheqel artificially high against the dollar and hurt exports, which grew by under 4%, compared with 8.5% in 1995.

In 1996 the influx of foreign workers into Israel to take over jobs from Palestinians prevented from working by the closures took on mammoth proportions. By the year’s end, estimates ranged from 200,000 to 250,000 such workers, over half of whom were in the country illegally. Government efforts to expel them were ineffectual, and a major social problem loomed.